Thursday, October 09, 2008

Some months ago, (and perhaps still now) one of the buzzwords bringing good fortune in the bicycle industry was 'high gas prices'. While the automobile industry was faring badly, the bicycle business was booming. Most prayed for lower gas prices, but the diametrically opposite people in the bicycle business secretly wished that it kept increasing. That seems like a cunning way of thinking, but in the end, business is business.

Now a bigger calamity might put all that to rest. Of course, you all know what I'm talking about! Just open the front pages of your newspaper.

But there could be a fair share of you who are still clueless about the breadth and depth of this huge financial mess. For the uninitiated in financial knowledge, just read this funny Subprime Primer put in simple stick figure terms.

Getting back, in the midst of such an issue of global proportions, I find it awful that very few in online bicycling circles (that includes publications, websites and blogs) are talking about the more pressing current state of affairs. Let's put Interbike 2008, Lance Armstrong and Britney Spears aside for a moment here.

The cold fact is that like all businesses, the cycling trade also depends upon such a thing as credit. And when credit stops flowing from markets, to banks, to businesses and to consumers, almost everything begins slowly heading downhill.

Now I'm not involved in the bicycling trade in any major way. Strictly speaking, I'm an outsider and that's the way I like to stay for now. But I did manage to chalk out a schematic of how money and goods and services flow in the bicycle business.

If you find anything out of place or not making sense, please feel free to correct me.

My Simple Schematic on How the Global Bicycle Trade Works

I'm not going to go into immense detail on every aspect shown in the graphic above. But just check out the overwhelming role that credit plays, not just in business but also in our personal lives.

Since the credit markets are at great distress, I see a lot of weaker brand names and small businesses having the possibility of being affected.

And the other funny thing is .... oil prices are falling as well, not rising.

I understand there'll be a good percentage of readers here closely associated with the bicycling industry. Here are some questions from me to you and to all in general to ponder over, discuss and intelligently comment on. I think most of the questions, if not all, will be put forth from the perspective of those at the lower end of the supply chain.Bear with me on the train of thoughts.

How do you foresee the impact on the bicycling industry because of the global financial turmoil?

1. Will brick and mortar bike shops make enough money to sustain themselves? Will we see a lot of bikes selling for cheap just to get rid of excess inventory? And with lesser access to credit in order to get new line of bikes in, are we going to see some unusually empty bike shop floors early next year together with dwindling shoppers?2. Will big brand names cut on the variety of lines of bicycles they offer to the public?

3. And what about the average consumer who won't be able to get a loan or credit with the same ease as in the past? With his buying power decreasing, what will the demand for bicycles be in the coming months? Don't you think the consumer mindset will be to hold onto money in these tough financial times? Shouldn't bicycle design itself change and strive to keep costs down instead of pushing for the high end bike sales.

4. And how on earth could we solve this? What can and should change in the way retail business is conducted today? Should the industry target more newcomers to cycling, as opposed to the ones who already have 400 bikes in the garage? Should bike shops focus more on service as opposed to emphasizing the selling of goods to make the margins? Should they charge higher prices on those services? And how will that decision affect the customer as a result.

5. Finally, as far as smaller brand names are concerned, how will they fare? Are consolidations of smaller bicycle companies by the bigger ones be the answer to saving them from possible collapse? The issue is in keeping the industry going, and maintaining people's jobs in these tough times.

29 comments:

Look at it another way. There's a remote possibility (number 6 on your list) that bikes could become a utility as opposed to a luxury item and MORE will be sold. perhaps the bike industry could work on that.

Re:your schematic1 - Don't kid yourself; bike shops don't have until the end of the year to pay. We need cash flow. The retailers that do take too long end up on a downward spiral, don't get the better bike brands to sell and end up failing in the end. (Amazingly, the end usually seems to draw out for quite some time.) The bicycle retail business is largely made up of cycling enthusiasts not business people. Most have no idea of their business’s day-to-day health. For that reason we will see more retail failures in trying times. 2 – Some suppliers/manufactures, such as Trek are self-financed and do not depend heavily on the banks.

The last thing I want is more consolidation. Like we've seen with airlines, banks, etc..., it works out in the short term, but leaves the industry much less able to adapt to new conditions, stiffles innovation, and keeps prices inflated. Of course, there's nothing the consumer can do but grin and bear it. Gotta love being the little guy.

Anon @ 8:51 - I was pointing out a general case scenario. According to contract terms, bike shops could be asked to pay for the model year's stock earlier. And yes, the big shots in the industry have better balance sheets and better financing. My concern is for the smaller ones towards the bottom of the ladder.

I'm wondering if one of the results would be fewer high-end bikes. It seems the price of the "stock" high-end bikes--especially road--has gone through the roof with many brands offering off-the-shelf bikes approaching $10K.

On a bike vacation, BikeVA, (cheap as far as vacations go, since you are biking everyday), a bike shop that sets up everyday at the host site, was offering some high end bikes taht they aquired from a failed shop. One fit me so I snapped it up for about 1/2 price. Even so, with all this uncertainty, I wish I had my $1,700 back. But I can ride it in bad times, even if I have three other bikes. Certainly, bike vacations make even more sense.

One one hand, people who were very very, rich and bought things like Range rovers, BMWs and road bikes. Are now finding themselves significantly less rich, but stile not completely broke broke. They will retain the urge to buy luxyry goods, They may want a new Porche, but only be able to afford a few bike. I live in Orange county and see this mentality first hand. A high end road bike, becomes a cheaper indulgance, that give you just as much ego boost as that new sports car. These are a small percentage of people, but they are one of the main driving forces behind the high end bike market. They are only interested in the absolute best of the best. One example of this would be a guy, who just walked in to the shop and bought a 10k supper record Prince in cash, because he thought it was cool.

On the other hand, you've got the people who turn to cycling for utilitarian purposes. They want to get around, and save money / get healthier/ protect the environment/ have fun. (any combination of these works) These type of ridders will have a strong desire to save money and buy affordable, long, lasting, low maintenance bikes. It's really more important that the bike is useful than fun. I think this part of the market could feed off people need to be more frugal and economic in the way they go about doing things like commuting.

This of course leaves all of the people in the middle. The by-cling enthusiast, who ride purely for fun and recreation. The only thing that really separates them from the, "high end" shopper is finance. They, buy all the cool bike stuff they can afford, all with varying price points. I think this segment of the market is likely to be the hardest hit. As there decision to spend of bikes, is based on their amount of expandable money.

That reminds me of a story that ran in the Economist of how Giant bicycles sold over 400,000 bicycles last month. While sale of bicycles are doing comparatively better than cars, are they really recession proof?

From the way the slowdown of the economy is going on now, we're likely heading into a depression here in the U.S and elsewhere (Europe, possibly Asia). We're already there - think about it, 1 trillion dollars wiped out in 5 days through the stock market decline! Plus, the bailout plan seems only like a band aid solution. The deficit crisis is never going to stop on a dime.

Thanks for your insight. I'm not sure where you're bringing this data from but this is exactly the sort of discussion I'd like to initiate here. TREK's overseas partnerships may help it weather the storms but I dont see the smaller guys in the industry doing very well. Plus, you're right about rising costs in china, lesser subsidization and the poor perception of quality of product.

I think we are going to see several things happen and this is pretty standard across most industries during times like this.

1 - Sales are going to drop no matter what the gas price is. People are unsure about their employment for the next year, so disposable income drops. The biggest part of the market that will be hit is your middle of the road lines. These are people upgrading from cheaper rides or buying their first "real mountain bike". When the economy turns back around...this will change.

2 - More innovation. As sales slow, manufacturers will have to capture the sales that are there through new designs and product.

3 - Skinning lines. If certain manufacturers have bikes that are very close to eachother...you might see one new model to replace two of last years model to improve efficiencies. Several have already done this including GT.

4 - Many aren't going to make it. The reality is that there are a lot of companies that are too far extended during the good times. When harder times hit...they are not prepared and can't make it through. Many of these rely on fast growth to maintain cash flow and are terrible businessman or book keepers. Expect to see some shops close and even some manufacturers close their doors for good. This is already happening in other pleasure industries like RV and boating.

Excerpts from a letter I received this morning from John Burke president of Trek bicycles,

…The Good News: 1. We track the year-to-year monthly sales of a group of 50 Trek retailers. In August, this group was up 23% compared to last year. Our preliminary numbers for September, show these retailers up over 10%. 2. Trek’s sales in Calendar Year 2008 are up significantly over last year. September sales in the U.S. market were up over 10%. 3. During the 1987 Stock Market crash and the recession of the early 90s, the bike business was relatively immune to market turmoil. 4. In this type of economy, there are winners and losers. SUV’s are losers; small cars are winners. We think bicycles are comparable to small cars. 5. A strong case can be made that this economic downturn may indeed turn out to be a good period for bicycles. a. There are great medium and long-term trends for the bicycle. b. The government is spending substantially more money on bicycling infrastructure. c. Higher gas prices have created a cycling commuter boom. d. Health issues and environmental issues are only going to continue to push people toward cycling…

…Let’s be clear. I’m not saying that everything will necessarily be great. What I am saying is that from what I see, at this point in time, it appears that bicycle retail is strong…

…You may be wondering about the financial strength of Trek. 1. Trek has never been in better financial health. a. 2008 will be another record year for both sales and profits. 2. Trek’s net worth is substantial and continues to grow each year. 3. Trek has sizeable credit lines through a very healthy banking group including J.P. Morgan and Bank of America. Our relationship with J.P. Morgan dates back over 25 years….

…Trek is as financially solid as it’s ever been… The single most important thing you can do to make sure your business is successful over the next 12 months and beyond is to improve every facet of your business…

John Burke thinks TREK will do just fine, okay I don't refute that but when a good number of retailers may close down their shops, TREK and other manufacturer's are going to lose their lines of supply. I can't see why sales won't be unaffected. Correct me.

"Should the industry target more newcomers to cycling, as opposed to the ones who already have 400 bikes in the garage?"

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It's well known that it is far easier (and cheaper) to sell to an existing customer that to try to get a new one, so I think that you may end up seeing more good used bikes available. I believe that dedicated riders will continue to buy high-end bikes.

Those bike shops with enough business sense may start taking trade-ins in order to keep moving new inventory while at the same time selling used bikes, which usually need parts & service, so I think that may be a good way for local shops to improve the bottom line.

I believe that in the end, everything will work itself out. Seems it always does.

I know that this is just a small part of the big picture, and a rather simplistic view.

What I find interesting is that people have 400 bikes in their garages? Darn it! I had no clue. I only have 2.

Ron, the only retailers that will end up closing shop are the ones that do not plan and prepare for times like this. Like I said before, most retailers are not business people. Budget, cashflow, balance sheet... are all mysteries to them. I speak from experience, I used to be one of them. Since we took "control" of our business things have never been better. Mom and pop shops may be a thing of the past but that doesn't mean they'll lose out to big boxes just better bike shops.Most people here are enthusiasts, if you look at where the big brands like Trek and Giant are at you'll see they are most definitely trying to cater to the up and commers.

Just wanted to clarify where the data was coming from. The data I am using is from the mainly from bicycle retailer, ceo's of bike companies and bicycle import data from the US govt. This is not anecdotal data - its hard numbers.

Why do you think Breezer was for sale? It was not because he wanted to cash out - he needed more resources to continue.

Trek does seem to be strong but there are literally dozens of brands struggling. It is getting tougher too as Trek, Specialized and Giant require an ever growing slice of the shop floor. I would think they will have to look at their minimum buys and adjust down if credit issue continues.

Someone here said something about TREK backed by Morgan Stanley. Well MS's bonds and stocks are dropping like stones down a hill. Its at its lowest since 1996. But the government will probably not allow them to go bankrupt.

Good post going here and great comments. If you look at this issue in one way, it could be a positive for big companies who could become more successful because all the smaller ones around them are crumbling. I tend to think the TREKs and GIANTS of the world will do fine. However, I'm wondering what'll come of someone like Cervelo, who's only product line are the high end road and TT bikes.

I would say that things are not as gloomy as might be though. Sure, there is a good chance that some smaller brands/ shops might not make it... but that is likely just an acceleration of the imminent. It's not all wine and roses, but it's not all doom and gloom either.

There is likely a bit more hope than fear, for many in the industry. I know that Interbike was the most positive this year than I can ever remember it personally.

An expanded version of this thought here; http://bicyclemarketingwatch.blogspot.com/2008/10/fear-and-loathing-in-global-economy.html

Following your invitation on Chris Writes, I landed here. I commented on Chris' site and on the similar bike economics article on Bicyclemarketingwatch.

I posted an article on BikeBiz.com about the Trek letter, and linked to all three discussions.

http://www.bikebiz.com/news/29837/Bikes-will-ride-out-the-recession

As the co-author of the soon to be published http://www.biketoworkbook.com I kind of want gas prices to remain at historically high prices, although give the volatile nature of that liquid, in chemical and financial terms, that was never going to be a given.

There are many other indicators that show that the bike trade is one of those that will do well in the coming years. However, the fact there's less credit around will make the growth slower, but perhaps more sensible and sustainable.

Sometimes it seems that the industry is pinning its hopes external factors to grow. Whether its high gas prices or the fixie trend, both happened outside of the industry's influence. There is nothing wrong with taking advantage of those situations but a real effort has not been made inside the industry, even though we all know it should and needs to be done.

James over at Bicycle Design poised the question of what kind of bike would draw in the masses? There are some good points in there (Ron) that are relevant to this topic.

Carlton - like you mentioned over on ChrisWrites - the demographic is male, getting older and afluent, but I think the industry has painted itself into a corner because thats who they were marketing to (and still do).

While I don't think there is much cost benefit to riding a bike in terms of saving gas money, there remains a huge benefit in terms of capital expense. I.e. if a young underemployed person can get by with just a bike, he/she can defer the purchase of an automobile costing thousands of dollars. Also, the bicycling counterculture seems to be pretty strong these days amongst urban youth. Finally, with Obama in office, it's kind of cool to be a liberal tree-hugger.